Hogs & Pigs Report Cautiously Encouraging

Friday’s USDA Hogs and Pigs report indicates the pace of breeding herd liquidation may be quickening, generally agreeing with pre-report estimates. Chicago Mercantile Exchange (CME) Group Lean Hogs futures responded by moving $0.50 to $1.05 higher in early trading on Monday, with the largest gain being in the April contract.

Figure 1 shows the key numbers from the report as well as the averages of analysts’ pre-report estimates and the differences between actual and estimated year-on-year percentages. Some key numbers and implications include:

• The breeding herd of 5.874 million head is 3.1% smaller than last year, marking an increase in the rate of reduction from 2.7% in June. That’s good news – especially since this survey captured Sept.1 inventories, only three weeks into this period of higher sow slaughter. The bad news is the June-September reduction is much smaller than in past liquidations. I believe that reflects the fact that clear liquidation signals did not come until the late-July break in CME Lean Hogs futures. I expect to see a larger year-on-year breeding herd reduction in the December report – even if profit prospects improve some. The cold, hard truth is that many producers are out of cash with no source of funds to support their operations.

• The market herd was 0.5% smaller than expected. That should be mildly supportive to prices over the next few months, but note that the largest share of this shortfall is in the under-60 lb. category. Q4 slaughter is going to be very near the levels projected by the June report. As Figure 2 shows, I still have eight weeks with the federally inspected (FI) slaughter above 2.3 million head. That includes the past two weeks when actual FI slaughter has exceeded the forecast level by 0.3% and 1%, respectively. Readers should note that Figure 2 assumes that imports of Canadian market hogs will continue to be in the 10,000/week range, but imports of Canadian feeder pigs will continue to trend downward at about 30,000 head fewer than year-ago levels.

• Average litter size grew by 2%, year-on-year, for the fifth straight quarter, which keeps average litter size growth above 2% since mid-2007, when circovirus vaccines first boosted productivity. There has been a lot of talk about sow retention, the resultant increases in sow herd average parity levels, and the impact that may have on productivity, although we’ve seen no damage yet. Two possible reasons come to mind. First, we may not have pushed average parity figures far enough to get a high proportion of Parity 6+ sows whose productivity drops significantly. Second, and I think more likely, the gilts we are bringing in are simply more productive due to genetic selection and proper development. This litter growth rate must slow down at some point, mustn’t it? Even if it does, I don’t expect any slowdown to be large. See Figure 3 for the new trend.

• Farrowing intentions for the next two quarters are perfectly in line with the sow herd size in the Sept. 1 report. It seems a bit curious, but those are the numbers! I fear that the intentions reported may turn out to be low for both quarters because we’ve just experienced the best summer for conception rates in memory. Some anecdotal evidence points to significant increases this summer, which suggests that the herd will produce more litters than normal this winter. That means more market hogs than we’d expect from these numbers from April through July or August. Producers should be ready to aggressively price hogs for Q2 and Q3 on any rallies in Lean Hog futures. Record Low Breeding Herd The 5.874 million breeding animals in this report breaks the old “low” of 5.947 million set in June 2004. At least it’s the lowest number I can find in any of our data going back to 1900 – and that comes from Professor Glenn Grimes, University of Minnesota, who knows much more about such things than I.

The lowest number Professor Grimes could find from 1900 onward was an inventory of 6.078 million “sows and gilts 6 months and older” in 1935. That number would exclude boars and selected younger gilts that would be included in today’s breeding herd number.

It also represents a U.S. herd decimated by Great Depression consumption. In 1923, there were 69.304 million hogs and pigs in the United States, among which were 14.133 million sows and gilts 6 months old and older. By 1935, the U.S. hogs and pigs count dropped to 39.066 million head and the sow/gilt number had dropped to the aforementioned 6.078 million. Tough times on the farm and in the economy drove us to eat the capital stock!

The most recent peak in the U.S. breeding herd occurred in June 1979, when U.S. producers had 10.368 million breeding animals. Commercial hog slaughter and production in 1980 were 96.074 million head and 16.617 billion pounds, respectively. Those numbers put slaughter per breeding animal at 9.267 head and average production per breeding animal at 1,602 lb., carcass weight.

The same measures in 2008 were 19.343 hogs slaughtered and 3,916 lb. of pork produced per June 2008 breeding animal. Even when one deducts the 8% of those pigs and pounds that originated in Canada, today’s output per breeding animal is more than double the level of less that 30 year ago.